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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003 Commission File No. 333-27341
TELEX COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 38-1853300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12000 PORTLAND AVENUE SOUTH, BURNSVILLE, MINNESOTA 55337
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (952) 884-4051
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
AS OF OCTOBER 31, 2003, TELEX COMMUNICATIONS, INC. HAD OUTSTANDING 4,987,127
SHARES OF COMMON STOCK, $0.01 PAR VALUE.
THIS DOCUMENT CONTAINS 24 PAGES.
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PART I. --- FINANCIAL INFORMATION
Item 1. Financial Statements Page(s)
Included herein is the following unaudited financial information:
Condensed Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002 3
Condensed Consolidated Statements of Operations for the three and nine month
periods ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
PART II. --- OTHER INFORMATION
Page(s)
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
(UNAUDITED) (SEE NOTE)
ASSETS
Current assets:
Cash and cash equivalents $ 3,467 $ 3,374
Accounts receivable, net 48,484 44,644
Inventories 48,503 47,686
Other current assets 7,042 4,710
--------- ---------
Total current assets 107,496 100,414
Property, plant and equipment, net 29,387 28,995
Deferred financing costs, net 1,464 2,659
Goodwill, net 23,262 23,154
Other assets 2,795 2,656
--------- ---------
$ 164,404 $ 157,878
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Revolving lines of credit $ 13,950 $ 3,916
Current maturities of long-term debt 107,293 17,275
Accounts payable 13,236 10,954
Accrued wages and benefits 10,719 9,562
Other accrued liabilities 10,518 7,896
Income taxes payable 6,423 7,960
--------- ---------
Total current liabilities 162,139 57,563
Long-term debt, net 63,130 154,630
Other long-term liabilities 14,326 13,693
--------- ---------
Total liabilities 239,595 225,886
--------- ---------
Shareholders' deficit:
Common stock and capital in excess of par 80,180 80,180
Accumulated other comprehensive loss (9,019) (7,029)
Accumulated deficit (146,352) (141,159)
--------- ---------
Total shareholders' deficit (75,191) (68,008)
--------- ---------
$ 164,404 $ 157,878
========= =========
See notes to condensed consolidated financial statements.
Note: The balance sheet at December 31, 2002 has been derived from the Company's
audited financial statements at that date.
3
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 69,587 $ 66,087 $ 199,298 $ 202,015
Cost of sales 39,837 38,064 115,543 117,834
----------- ----------- ----------- -----------
Gross profit 29,750 28,023 83,755 84,181
----------- ----------- ----------- -----------
Operating expenses:
Engineering 3,374 3,104 10,551 9,113
Selling, general and administrative 17,544 17,793 56,130 53,665
Corporate charges -- -- -- 541
Amortization of other intangibles 3 30 18 90
Pension curtailment gain -- -- (2,414) --
----------- ----------- ----------- -----------
20,921 20,927 64,285 63,409
----------- ----------- ----------- -----------
Operating profit 8,829 7,096 19,470 20,772
Interest expense (7,748) (6,740) (22,152) (19,272)
Other income, net 327 256 523 1,305
----------- ----------- ----------- -----------
Income (loss) before income taxes 1,408 612 (2,159) 2,805
Provision for income taxes 885 776 3,034 2,656
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of change in accounting 523 (164) (5,193) 149
Cumulative effect of change in accounting -- -- -- (29,863)
----------- ----------- ----------- -----------
Net income (loss) $ 523 $ (164) $ (5,193) $ (29,714)
=========== =========== =========== ===========
Basic income (loss) per common share
Income (loss) before cumulative effect of change in accounting $ 0.10 $ (0.03) $ (1.04) $ 0.05
Cumulative effect of change in accounting -- -- -- (9.73)
----------- ----------- ----------- -----------
Net income (loss) $ 0.10 $ (0.03) $ (1.04) $ (9.68)
=========== =========== =========== ===========
Diluted income (loss) per common share
Income (loss) before cumulative effect of change in accounting $ 0.10 $ (0.03) $ (1.04) $ 0.03
Cumulative effect of change in accounting -- -- -- (5.99)
----------- ----------- ----------- -----------
Net income (loss) $ 0.10 $ (0.03) $ (1.04) $ (5.96)
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 4,987,127 4,987,127 4,987,127 3,069,044
=========== =========== =========== ===========
Diluted 4,987,127 4,987,127 4,987,127 4,987,127
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net loss $ (5,193) $(29,714)
Adjustments to reconcile net loss to cash flows from operations:
Depreciation and amortization 4,646 5,022
Amortization of finance charges and pay-in-kind interest charge 17,470 13,846
Gain on disposition of assets (319) (1,019)
Cumulative effect of change in accounting -- 29,863
Pension curtailment gain (2,414) --
Change in operating assets and liabilities (3,963) (7,494)
Change in long-term liabilities (57) 865
Other, net 660 547
-------- --------
Net cash provided by operating activities 10,830 11,916
-------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,375) (3,724)
Proceeds from disposition of assets 1,158 2,215
Other 166 165
-------- --------
Net cash used in investing activities (3,051) (1,344)
-------- --------
FINANCING ACTIVITIES:
Borrowings (repayments) under revolving lines of credit, net 1,118 (1,770)
Repayment of long-term debt (9,007) (7,588)
Borrowings of long-term debt -- 1,216
Payment of deferred financing costs -- (242)
-------- --------
Net cash used in financing activities (7,889) (8,384)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 203 220
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase 93 2,408
Balance at beginning of period 3,374 3,026
-------- --------
Balance at end of period $ 3,467 $ 5,434
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Interest $ 4,339 $ 5,446
======== ========
Income taxes $ 5,065 $ 2,909
======== ========
See notes to condensed consolidated financial statements.
5
TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States (U.S.) for interim financial information,
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the U.S. for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results
for the interim periods are not necessarily indicative of the results that
may be expected for the full year.
Preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the U.S. requires management
to make estimates and assumptions that affect the reported amounts in the
financial statements and accompanying notes. Actual results could differ
from those estimates. For further information, refer to the consolidated
financial statements and footnotes included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2002.
Certain 2002 amounts have been reclassified to conform to 2003
presentation.
2. Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
2003 2002
---- ----
Raw materials $18,911 $19,224
Work in process 7,379 6,840
Finished products 22,213 21,622
------- -------
$48,503 $47,686
======= =======
3. Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS
142). The Company completed an initial impairment review of goodwill in
the fourth quarter of 2002. The review resulted in an impairment loss of
$29.9 million related to the Professional Audio business segment that has
been accounted for as a cumulative effect of change in accounting in
accordance with SFAS 142 and is reflected in the results of operations for
the nine months ended September 30, 2002. The Company has certain amounts
of goodwill denominated in foreign currencies that fluctuate with movement
of exchange rates.
The following table presents the changes in carrying value of goodwill by
business segment as of September 30, 2003 (in thousands):
6
Audio and Wireless
Professional Audio Technology Total
------------------ ---------- -----
Balance as of December 31, 2002 $17,064 $ 6,090 $23,154
Foreign currency translation 108 -- 108
------- ------- -------
Balance as of September 30, 2003 $17,172 $ 6,090 $23,262
======= ======= =======
4. Debt
Long-term debt consists of the following (in thousands):
September 30, December 31,
2003 2002
---- ----
Senior Secured Credit Facility (Revolving Credit Facility) $ -- $ 8,563
Senior Secured Credit Facility (Term Loan Facility):
Term Loan A 13,588 15,606
Term Loan B 44,974 51,655
Tranche A Senior Secured Notes 33,431 27,692
Tranche B Senior Secured Notes 14,875 12,268
Senior Subordinated Discount Notes 60,506 52,981
Senior Subordinated Notes 550 550
Other debt 2,499 2,590
--------- ---------
170,423 171,905
Less - current portion (107,293) (17,275)
--------- ---------
Total long-term debt $ 63,130 $ 154,630
========= =========
5. Income Taxes
The Company recorded an income tax provision of $0.9 million and $3.0
million on pre-tax income of $1.4 million and pre-tax loss of $2.2 million
for the three months and nine months ended September 30, 2003,
respectively. The income tax provision for the nine months ended September
30, 2003 is comprised of a U.S. Federal and state income tax benefit of
$1.4 million, offset by a tax valuation allowance adjustment of $1.4
million, and an income tax provision of $3.0 million attributed to income
of certain foreign subsidiaries. The income tax provision for the nine
months ended September 30, 2002 is comprised of a U.S. Federal and state
income tax benefit of $3.7 million, offset by a tax valuation allowance
adjustment of $3.7 million, and an income tax provision of $2.7 million
attributed to income of certain foreign subsidiaries.
The Company has a deferred tax asset of $18.8 million offset by a tax
valuation allowance of $18.6 million at September 30, 2003 due to the
uncertainty of the realization of future tax benefits. The realization of
the future tax benefits related to the deferred tax asset is dependent on
many factors, including the Company's ability to generate sufficient
taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to
the adequacy of the valuation allowance for financial reporting purposes.
6. Earnings Per Share Data
Effective April 16, 2002, the Company converted all of its outstanding
Series A Preferred Stock and Series B Preferred Stock, totaling 4,987,017
shares, into an equal number of shares of its
7
Common Stock. The conversion of the Preferred Stock was at the election of
the Company with each share or fractional share of the Series A and Series
B Preferred Stock convertible into one share or equivalent fractional
share of Common Stock. Information presented for the three and nine months
ended September 30, 2002 includes the effect of the conversion on a
diluted basis.
7. Related-Party Transactions
The Company recorded a charge to operations of $0.5 million for the nine
months ended September 30, 2002, for management services provided by
Greenwich Street Capital Partners, L.P., a related party. The services
included, but were not limited to, developing and implementing corporate
and business strategy and providing other consulting and advisory
services. The agreement expired in May 2002.
The Company is accruing interest, at the rate of 2 percent per month, on
the outstanding management services fee balance. Under the terms of the
Senior Secured Credit Facility, the Company is prohibited from making any
payment, in cash or other property, of the management services fee and the
accrued interest on the unpaid balance until repayment in full of the
loans outstanding under the Senior Secured Credit Facility. The Company
had a balance payable, inclusive of interest, of $2.9 million at September
30, 2003 that is included on the condensed consolidated balance sheet as a
component of other long-term liabilities.
In 2000, the Company relocated its corporate headquarters to a facility
leased from DRF 12000 Portland LLC (the LLC), an entity in which the
Company has a 50% interest. The Company contributed cash of $0.6 million
to the LLC and the investment is accounted for under the equity method.
The Company's allocable share of the LLC income is included as a component
of other income in the condensed consolidated statements of operations.
The LLC financed the purchase of the facility with a mortgage secured by
the facility. At September 30, 2003, the remaining balance on the mortgage
was $6.7 million. The annual lease payments to the LLC are $1.1 million
for years one to five and $1.2 million for years six to ten. The Company
may renew the lease at the end of the initial lease term for three renewal
terms of five years each. The lease has been classified as an operating
lease and the Company records the lease payments as rent expense. The
Company's exposure to loss associated with the LLC is its investment in
the LLC which, totaled $0.8 million at September 30, 2003. The investment
in the LLC is included in the condensed consolidated balance sheet as a
component of other assets.
Telex has reviewed FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51" (FIN 46), pertaining
to the consolidation of variable interest entities and has determined that
no changes are required to the consolidation procedures currently followed
by the Company.
8. Comprehensive Loss
Comprehensive loss reflects the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. For the Company, comprehensive net loss represents net
income or loss adjusted for foreign currency translation adjustments and
minimum pension liability adjustments. Comprehensive loss is as follows
(in thousands):
8
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ 523 $ (164) $ (5,193) $(29,714)
Other comprehensive income:
Foreign currency translation adjustment 781 30 3,088 3,061
Minimum pension liability -- -- (5,078) --
-------- -------- -------- --------
Comprehensive income (loss) $ 1,304 $ (134) $ (7,183) $(26,653)
======== ======== ======== ========
The components of accumulated other comprehensive loss are as follows (in
thousands):
September 30, December 31,
2003 2002
---- ----
Foreign currency translation $ 243 $3,331
Minimum pension liability 8,776 3,698
------ ------
$9,019 $7,029
====== ======
9. Pension Curtailment Gain
In the nine month period ended September 30, 2003, the Company amended its
US defined benefit pension plan, eliminating the earning of pay credits
after June 30, 2003 and closing the plan to new participants effective
June 30, 2003. The amendments to the pension plan resulted in recognition
of a $2.4 million curtailment gain associated with the recognition of
previously unrecognized prior service benefits in accordance with SFAS No.
88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits."
In conjunction with the curtailment, the Company remeasured the pension
plan's assets and liabilities as of June 30, 2003. The Company recorded an
additional minimum pension liability of $5.1 million as a result of the
remeasurement.
10. Segment Information
The Company has two business segments: Professional Audio and Audio and
Wireless Technology.
Professional Audio
Professional Audio consists of five product lines within the overall
professional audio market, including: (i) permanently installed sound
systems; (ii) sound products used by professional musicians and sold
principally through retail channels; (iii) sound products used in
professional concerts, recording projects and radio and television
broadcasts; (iv) broadcast communication products, including advanced
digital matrix intercoms, used by broadcasters (including all major
television networks) to control production communications, intercoms,
headsets and wireless communications systems used by professional, college
and high school football teams and stadiums and other professional and
high school sports teams; and (v) wired and wireless microphones used in
the education, sports, broadcast, music and religious markets.
Audio and Wireless Technology
9
Audio and Wireless Technology targets six principal product markets
including: (i) digital audio duplication products for the religious,
education and enterprise markets; (ii) military/aviation communication
products for the military and aviation markets; (iii) wireless networking
products serving the original equipment manufacturer, wireless internet
service provider and medical telemetry markets; (iv) land mobile
communication products for the public safety, military and industrial
markets; (v) audio and wireless education products for classroom and
computer based education markets; and (vi) teleconferencing products for
the enterprise, education and government markets.
The following tables provide information by business segment for the three
month and nine month periods ended September 30, 2003 and 2002 (in
thousands):
10
Three months ended Nine months ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales
Professional Audio $ 54,749 $ 50,059 $ 155,235 $ 151,921
Audio and Wireless Technology 14,838 16,028 44,063 50,094
--------- --------- --------- ---------
$ 69,587 $ 66,087 $ 199,298 $ 202,015
========= ========= ========= =========
Operating profit (loss)
Professional Audio $ 6,670 $ 5,135 $ 15,405 $ 13,240
Audio and Wireless Technology 2,369 2,540 3,725 9,229
Corporate (210) (579) 340 (1,697)
--------- --------- --------- ---------
$ 8,829 $ 7,096 $ 19,470 $ 20,772
========= ========= ========= =========
Depreciation expense
Professional Audio $ 1,184 $ 1,266 $ 3,815 $ 3,997
Audio and Wireless Technology 85 54 315 245
Corporate 173 180 498 690
--------- --------- --------- ---------
$ 1,442 $ 1,500 $ 4,628 $ 4,932
========= ========= ========= =========
Capital expenditures
Professional Audio $ 920 $ 1,456 $ 2,119 $ 3,011
Audio and Wireless Technology 196 123 420 331
Corporate 685 199 1,836 382
--------- --------- --------- ---------
$ 1,801 $ 1,778 $ 4,375 $ 3,724
========= ========= ========= =========
Total assets
Professional Audio $121,823 $115,466
Audio and Wireless Technology 37,131 35,020
Corporate 5,450 18,559
-------- --------
$164,404 $169,045
======== ========
Corporate operating expenses include unallocated corporate engineering, selling,
general and administrative costs, corporate charges, amortization of other
intangibles and restructuring charges. Corporate identifiable assets relate
principally to the Company's investment in information systems and and corporate
facilities, as well as deferred financing costs.
The Company's net sales into each of its principal geographic regions were as
follows (in thousands):
Three months ended Nine months ended
---------------------------- ------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
United States $ 35,209 $ 35,903 $101,265 $108,125
Europe 19,201 16,726 56,602 50,360
Asia 9,731 10,091 25,179 31,190
Other foreign countries 5,446 3,367 16,252 12,340
-------- -------- -------- --------
$ 69,587 $ 66,087 $199,298 $202,015
======== ======== ======== ========
It is not practical for the Company to disclose revenue by product or service
grouping for financial reporting purposes as the Company's systems do not
reliably compile this information.
Long-lived assets of the Company's U.S. and International operations were as
follows (in thousands):
September 30, 2003 December 31, 2002
------------------ -----------------
United States $45,488 $46,505
International 11,420 10,959
------- -------
$56,908 $57,464
======= =======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as other sections of this report, contains forward-looking
statements, including, without limitation, statements relating to our plans,
strategies, objectives and expectations, that are based on management's current
opinions, beliefs, or expectations as to future results or future events and are
made pursuant to the "safe harbor" provisions of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. Any such forward-looking
statements involve known and unknown risks and uncertainties and our actual
results may differ materially from those forward-looking statements. While made
in good faith and with a reasonable basis based on information currently
available to management, we cannot assure you that such opinions or expectations
will be achieved or accomplished. We do not undertake to update, revise or
correct any of the forward-looking information contained in this report. The
following factors, in addition to those discussed elsewhere in this report, are
representative of those factors that could affect our future results and could
cause such results to differ materially from those expressed in such
forward-looking statements: (i) the timely development and market acceptance of
new products; (ii) the financial resources of competitors and the impact of
competitive products and pricing; (iii) changes in general and industry specific
economic conditions on a national, regional or international basis; (iv) changes
in laws and regulations, including changes in accounting standards; (v) the
timing and success of the implementation of changes in our operations to effect
cost savings; (vi) opportunities that may be presented to and pursued by us;
(vii) our financial resources, including our ability to access external sources
of capital; (viii) war; (ix) natural or manmade disasters (including material
acts of terrorism or other hostilities which impact our markets) and (x) such
risks and uncertainties as are detailed from time to time in our reports and
filings with the Securities and Exchange Commission.
The following discussion should be read in conjunction with our condensed
consolidated financial statements and notes thereto contained elsewhere in this
report.
In this report, "Company," "we," "our," "us" and "Telex" refer to Telex
Communications, Inc. With respect to the descriptions of our business contained
in this report, such terms refer to Telex Communications, Inc. and our
subsidiaries.
OVERVIEW
Telex is a leader in the design, manufacture and marketing of sophisticated
audio and wireless communications equipment to commercial, professional and
industrial customers. Telex provides high value-added communications products
designed to meet the specific needs of customers in commercial, professional and
industrial markets. We offer a comprehensive range of products worldwide for
professional audio systems as well as for audio and wireless product markets,
including wired and wireless microphones, wired and wireless intercom systems,
mixing consoles, signal processors, amplifiers, loudspeaker systems, headphones
and headsets, digital audio duplication products, antennas, land mobile
communication systems and wireless assistive listening systems. Our products are
used in airports, theaters, sports arenas, concert halls, cinemas, stadiums,
convention centers, television and radio broadcast studios, houses of worship
and other venues where music or speech is amplified or transmitted, and by
professional entertainers, television and radio on-air talent, airline pilots
and the hearing impaired in order to facilitate speech or communications.
12
Telex has two business segments: Professional Audio and Audio and Wireless
Technology. Professional Audio consists of five product lines within the overall
professional audio market, including: (i) permanently installed sound systems;
(ii) sound products used by professional musicians and sold principally through
retail channels; (iii) sound products used in professional concerts, recording
projects and radio and television broadcasts; (iv) broadcast communication
products, including advanced digital matrix intercoms used by broadcasters
(including all major television networks) to control production communications,
intercoms, headsets and wireless communications systems used by professional,
college and high school football teams and stadiums and other professional and
high school sports teams; and (v) wired and wireless microphones used in the
education, sports, broadcast, music and religious markets.
Audio and Wireless Technology targets six principal product markets including:
(i) digital audio duplication products for the religious, education and
enterprise markets; (ii) military/aviation communication products for the
military and aviation markets; (iii) wireless networking products serving the
original equipment manufacturer, wireless internet service provider and medical
telemetry markets; (iv) land mobile communication products for the public
safety, military and industrial markets; (v) audio and wireless education
products for classroom and computer based education markets; and (vi)
teleconferencing products for the enterprise, education and government markets.
We maintain assets and/or operations in a number of foreign jurisdictions, the
most significant of which are Germany, the United Kingdom, Japan, Singapore, and
Hong Kong. In addition, we conduct business in local currency in many countries,
the most significant of which are Germany, the United Kingdom, Japan, Hong Kong,
Singapore, Canada, Australia and France. Exposure to U.S. dollar/Euro and U.S.
dollar/British pound exchange rate volatility is mitigated to some extent by our
ability to source production needs with existing manufacturing capacity in
Germany and Great Britain, and the exposure to the U.S. dollar/Japanese yen
exchange rate volatility is to some extent mitigated by sourcing products
denominated in yen from Japan or through contractual provisions in sales
agreements with certain customers. Nevertheless, we have a direct and continuing
exposure to both positive and negative foreign currency movements.
We report foreign exchange gains or losses on transactions as part of other
(income) expense. Gains and losses on translation of foreign currency
denominated balance sheets are classified as currency translation adjustments
and are included in "accumulated other comprehensive loss" as part of
shareholders' deficit.
13
CRITICAL ACCOUNTING POLICIES
There has been no material change in our Critical Accounting Policies as
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2002.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information regarding
certain items in our condensed consolidated statements of operations, in
thousands:
Three months ended Nine months ended
------------------------------------ ---------------------------------------
September 30, September 30, % September 30, September 30, %
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
Net sales:
Professional Audio $ 54,749 $ 50,059 9.4% $ 155,235 $ 151,921 2.2%
Audio and Wireless Technology 14,838 16,028 -7.4% 44,063 50,094 -12.0%
-------- -------- --- --------- --------- ----
Total net sales 69,587 66,087 5.3% 199,298 202,015 -1.3%
-------- -------- --- --------- --------- ----
Total gross profit 29,750 28,023 83,755 84,181
% of sales 42.8% 42.4% 42.0% 41.7%
Operating profit 8,829 7,096 19,470 20,772
Income (loss) before cumulative effect of
change in accounting 523 (164) (5,193) 149
Cumulative effect of change in accounting -- -- -- (29,863)
-------- -------- --------- ---------
Net income (loss) $ 523 $ (164) $ (5,193) $ (29,714)
======== ======== ========= =========
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Net sales. Net sales increased $3.5 million, or 5.3%, from $66.1 million for the
three months ended September 30, 2002 to $69.6 million for the three months
ended September 30, 2003. Net sales strengthened in the third quarter of 2003
compared to the third quarter of 2002 as we experienced higher sales in our
Asian marketplaces. Net sales decreased $2.7 million, or 1.3%, from $202.0
million for the nine months ended September 30, 2002 to $199.3 million for the
nine months ended September 30, 2003. Net sales in the Professional Audio
segment increased slightly for the nine month comparative periods due to higher
speaker product sales while sales in the Audio and Wireless Technology segment
declined significantly due to the discontinuance of sales of computer audio
products, which we exited in the second quarter of 2003, and hearing instrument
products, which we exited in the first quarter of 2002, and sluggishness in the
education and military/aviation markets. Our net sales, excluding the impact of
discontinued products, increased approximately 6.4% for the three months ended
September 30, 2003 compared to the three months ended September 30, 2002 and
were flat for the nine months ended September 30, 2003 and 2002, respectively.
Net sales in the Professional Audio segment increased $4.7 million, or 9.4%,
from $50.0 million for the three months ended September 30, 2002 to $54.7
million for the three months ended September 30, 2003. We generated increased
Asian net sales in the third quarter of 2003 as the professional audio
marketplace rebounded from a slow economic cycle experienced earlier this year.
Net sales increased $3.3 million, or 2.2%, from $151.9 million for the nine
months ended September 30, 2002 to $155.2 million for the nine months ended
September 30, 2003. Higher sales of our speaker and electronics product lines
were offset by lower sales of our microphone products.
14
Net sales in the Audio and Wireless Technology segment decreased $1.2 million,
or 7.4%, from $16.0 million for the three months ended September 30, 2002 to
$14.8 million for the three months ended September 30, 2003. Net sales decreased
$6.0 million, or 12.0%, from $50.1 million for the nine months ended September
30, 2002 to $44.1 million for the nine months ended September 30, 2003. Net
sales, excluding sales of computer audio products in both periods and
discontinued hearing instruments products in the nine months ended September 30,
2002, decreased approximately 7%. The decline in net sales, after excluding
discontinued products, is attributed primarily to lower sales of products to the
education and military/aviation markets, in part due to governmental budget
issues and the sluggishness in the airline industry.
Gross profit. Gross profit increased $1.7 million, or 6.2%, from $28.0 million
for the three months ended September 30, 2002 to $29.7 million for the three
months ended September 30, 2003. Gross profit decreased $0.4 million, or 0.5%,
from $84.2 million for the nine months ended September 30, 2003 to $83.8 million
for the nine months ended September 30, 2003. The gross margin rate increased to
42.8% for the three months ended September 30, 2003 compared to 42.4% for the
three months ended September 30, 2002. The gross margin rate increased to 42.0%
for the nine months ended September 30, 2003 compared to 41.7% for the nine
months ended September 30, 2002. Included in the nine month period ended
September 30, 2003 are impairment charges for inventories and fixed assets,
totaling $1.4 million, associated with exiting the computer audio product line.
Excluding these charges, as a percentage of net sales, the gross margin rate
increased to 42.7% for the nine months ended September 30, 2003. The increase in
the gross margin rate for 2003 from the corresponding periods in 2002 is
attributed primarily to improved manufacturing efficiencies and lower operating
costs resulting from restructuring measures implemented in 2001 and 2002.
The gross margin rate for the Professional Audio segment increased slightly from
42.9% for the three months ended September 30, 2002 to 43.0% for the three
months ended September 30, 2003. The gross margin rate increased from 41.1% for
the nine months ended September 30, 2002 to 43.4% for the nine months ended
September 30, 2003. The increase in the gross margin rate for 2003 from the
corresponding periods in 2002 is attributed primarily to the continued benefits
of restructuring measures implemented in 2001 and 2002 and to increased sales of
high-margin products.
The gross margin rate for the Audio and Wireless Technology segment increased
from 40.9% for the three months ended September 30, 2002 to 41.9% for the three
months ended September 30, 2003. The gross margin rate decreased from 43.4% for
the nine months ended September 30, 2002 to 37.3% for the nine months ended
September 30, 2003. The gross margin rate, excluding the impairment charges
discussed above, was 40.6% for the nine-month period ended September 30, 2003.
The decrease in the gross margin rate for the nine-month period 2003 from the
corresponding period in 2002 is attributed primarily to lower sales of
high-margin products and to manufacturing inefficiencies.
Engineering. Engineering expenses increased $0.3 million, or 8.7%, from $3.1
million for the three months ended September 30, 2002 to $3.4 million for the
three months ended September 30, 2003. Engineering expenses increased $1.4
million, or 15.8%, from $9.1 million for the nine months ended September 30,
2002 to $10.5 million for the nine months ended September 30, 2003. The increase
in spending for the three and nine month periods in 2003 from the corresponding
periods in 2002 is attributed primarily to spending associated with new product
15
development in the Professional Audio segment.
Selling, general and administrative. Selling, general and administrative
expenses decreased $0.3 million, or 1.4%, from $17.8 million for the three
months ended September 30, 2002 to $17.5 million for the three months ended
September 30, 2003. Selling, general and administrative expenses increased $2.4
million, or 4.6%, from $53.7 million for the nine months ended September 30,
2002 to $56.1 million for the nine months ended September 30, 2003. The increase
in expenses in 2003 is attributed mainly to recording an accrual for legal
settlements in the nine months ended September 2003 and higher international
selling and marketing costs offset by lower general and administrative expenses.
International selling, general and administrative expenses increased in the 2003
periods compared to the corresponding 2002 periods mainly from strengthening
foreign currencies compared to the U.S. dollar. We implemented cost controls as
a result of the slowdown in our sales in the first three months of 2003 and the
selling, general and administrative expenses, as a percentage of net sales, have
declined after the three months ended March 31, 2003. We expect these expenses
for the fourth quarter of 2003 to remain relatively flat with the third quarter
amounts.
Corporate charges. There were no corporate charges in the nine-month period
ended September 30, 2003. Corporate charges of $0.5 million were recorded for
the nine-month period ended September 30, 2002. The charges represented fees
incurred for consulting and management services provided by Greenwich Street
Capital Partners, Inc. under a consulting and management services agreement that
expired in May 2002.
Amortization of other intangibles. We recorded amortization expense related to
identifiable intangible assets having definite lives of approximately $3,000 and
$30,000 for the three months ended September 30, 2003 and 2002, respectively,
and $18,000 and $90,000 for the nine months ended September 30, 2003 and 2002,
respectively.
Pension curtailment gain. We recorded a pension curtailment gain of $2.4 million
in the nine months ended September 30, 2003 resulting from our decision to
freeze future pension plan benefits effective June 30, 2003. This decision by
Telex resulted in recognition of previously unrecognized prior service benefits
in accordance with SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
(SFAS 88).
Interest expense. Interest expense increased from $6.7 million for the three
months ended September 30, 2002 to $7.7 million for the three months ended
September 30, 2003. Included in interest expense is $5.7 million and $4.4
million of pay-in-kind interest expense for the three months ended September 30,
2003 and 2002, respectively. Our interest expense increased from $19.3 million
for the nine months ended September 30, 2002 to $22.2 million for the nine
months ended September 30, 2003. Included in interest expense is $15.9 million
and $12.3 million of pay-in-kind interest expense for the nine months ended
September 30, 2003 and 2002, respectively. Interest expense increased primarily
because of the higher pay-in-kind interest expense that offset the benefits of
lower average outstanding indebtedness and lower average interest rates on non
pay-in-kind debt.
Other income. Other income of $0.3 million for the three months ended September
30, 2003 is principally from the gain on the sale of an idle facility. Other
income of $0.3 million for the three months ended September 30, 2002 is
principally from foreign currency gains and the profit
16
from the sale of production assets related to shutdown of certain manufacturing
facilities. For the nine months ended September 30, 2003 other income of $0.5
million is principally from the gain on sale of production assets related to
shutdown of certain manufacturing facilities and from amortization of deferred
revenue for a patent fee, trademark license fee and non-compete agreement
associated with the sale of hearing instrument product lines. Other income of
$1.3 million for the nine months ended September 30, 2002 is principally from
the sale of $2.1 million of assets related to the hearing instrument product
lines.
Income taxes. Our effective tax rate for the three month and nine month periods
ended September 30, 2003 and 2002, respectively, is not meaningful because a tax
benefit has not been recorded on the pretax loss in the United States. The tax
provision recorded relates only to the countries in which we are profitable.
Income tax expense increased in 2003 compared to 2002, as foreign subsidiary
taxable income in higher tax-rate countries has increased.
As of September 30, 2003, we have a reserve of $4.2 million included in income
taxes payable for tax liability, penalties, and accrued interest (as of the
settlement date) related to a dispute for taxable years 1990 through 1995. We
have agreed with the Internal Revenue Service on the final amount of the tax
liability to be paid and have been making monthly payments.
At September 30, 2003, we have $21.7 million of net operating loss
carryforwards. The U.S. net operating loss carryforward is $20.9 million, of
which $0.5 million expires in 2021, $16.0 million expires in 2022 and $4.4
million expires in 2023. We have established a net deferred tax valuation
allowance of $18.6 million due to the uncertainty of the realization of future
tax benefits. This amount relates primarily to the U.S. deferred tax assets as
our realization of the future tax benefits related to the deferred tax asset is
dependent on our ability to generate taxable income within the net operating
loss carryforward period. We have considered this factor in reaching our
conclusion as to the adequacy of the valuation allowance for financial reporting
purposes.
Cumulative effect of a change in accounting. We recorded a charge of $29.9
million in 2002 related to the impairment of goodwill related to our
Professional Audio business segment in accordance with the guidance in SFAS 142.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had cash and cash equivalents of $3.5 million compared
to $3.4 million at December 31, 2002.
Our principal source of funds for the nine months ended September 30, 2003
consisted of $10.8 million of cash provided by operating activities and $1.2
million generated from the sale of idle production assets. Our principal uses of
funds were for debt retirement of $7.9 million, net of borrowings, and $4.4
million for capital expenditures. Our principal source of funds for the nine
months ended September 30, 2002 was $11.9 million of cash provided by operating
activities and $2.2 million generated from the sale of assets from a
discontinued product line. Our principal uses of funds for the nine months ended
September 30, 2002 were for debt retirement of $8.1 million, net of borrowings,
and $3.7 million for capital expenditures.
Our investing activities consist mainly of capital expenditures to maintain
facilities, acquire machines or tooling, update certain manufacturing processes,
update information systems and
17
improve efficiency. We anticipate our capital expenditures for 2003 will be in
the range of $7.0 to $8.0 million. Our ability to make capital expenditures is
subject to certain restrictions under our senior secured credit facility, our
senior secured notes, and our senior subordinated discount notes.
Telex's accounts receivable of $48.5 million as of September 30, 2003 increased
$3.9 million from $44.6 million at December 31, 2002. Excluding the impact of
foreign currencies exchange rate movements, our accounts receivable increased
$2.1 million from December 31, 2002. The increase is primarily a result of
higher receivables at our U.S. and Germany operations resulting from higher
sales activity in the third quarter of 2003 compared to the sales activity in
the fourth quarter of 2002.
Our inventories of $48.5 million as of September 30, 2003 increased $0.8 million
from $47.7 million at December 31, 2002. Excluding the impact of foreign
currencies exchange rate movements, our inventories decreased $1.3 million from
December 31, 2002. We expect to continue to reduce our investment in inventories
and anticipate future inventory levels will decline.
Our consolidated indebtedness increased $8.6 million from $175.8 million at
December 31, 2002 to $184.4 million at September 30, 2003. The increase is
attributed mainly to our senior secured notes and senior subordinated discount
notes under which interest expense accrues as additional indebtedness, and to
increases in borrowings under our revolving credit facilities. The senior
secured notes accreted by $8.4 million and the senior subordinated discount
notes accreted by $7.5 million, adding $15.9 million to our indebtedness since
December 31, 2002. The additional indebtedness is payable in cash at maturity,
with the senior secured notes subject to an acceleration clause based on our
financial performance. Offsetting the additional indebtedness were required loan
payments, totaling $9.0 million, made under our term loan facility and other
existing loans.
We rely mainly on internally generated funds and, to the extent necessary,
borrowings under the U.S. revolving credit facility and foreign working capital
lines to meet our liquidity needs. Our liquidity needs arise primarily from debt
service, working capital needs and capital expenditure requirements.
Our current credit facilities include the senior secured credit facility
(expiring on April 30, 2004), consisting of the term loan facility of $58.6
million, the revolving credit facility, subject to certain borrowing base
limitations, of $25.0 million, and foreign working capital lines (with on demand
repayment provisions), subject to certain limitations, of $11.0 million. In
certain instances the foreign working capital lines are secured by a lien on
foreign real property, leaseholds, accounts receivable and inventory or are
guaranteed by another subsidiary.
As of September 30, 2003 all of our $58.6 million term loan facility is payable
within the next 12 months. In addition we had outstanding borrowings of $10.4
million under the revolving credit facility and outstanding borrowings of $3.5
million under our foreign working capital lines. The net availability under the
revolving credit facilities, after deduction for open letters of credit and
allowing for borrowing base limitations, was $14.2 million at September 30,
2003. Outstanding balances under substantially all of these credit facilities
bear interest at floating rates based upon the interest rate option selected by
us; therefore, our financial condition is and will continue to be affected by
changes in the prevailing interest rates. The effective interest rate under
these credit
18
facilities for the nine months ended September 30, 2003 was 6.9%.
Pursuant to the term loan facility, we are required to make principal payments
under (i) the $50.0 million Tranche A Term Loan Facility ($13.6 million of which
was outstanding at September 30, 2003), of $0.5 million and $13.1 million in the
remainder of 2003 and 2004, respectively, with a final maturity date of April
30, 2004 and (ii) the $65.0 million Tranche B Term Loan Facility ($45.0 million
of which was outstanding at September 30, 2003), of $1.8 million and $43.2
million in the remainder of 2003 and 2004, respectively, with a final maturity
date of April 30, 2004. In addition, under the terms of the senior secured
credit facility, we are required to make mandatory prepayments from proceeds of
the sale of assets and an additional payment in 2003 and 2004 if our operating
performance for 2002 and 2003 exceeds certain targets. In the nine months ended
September 30, 2003, we made an additional payment of $0.5 million related to our
2002 operating performance.
As of September 30, 2003 our entire $48.3 million senior secured notes are
payable within the next 12 months at a maturity value of $60.0 million
(including future accretion of interest expense as additional indebtedness).
In addition to payments on our term loan facility and senior secured notes, we
are required to make principal payments totaling $0.4 million in the next 12
months pursuant to our other U.S. and foreign debt agreements.
We incurred substantial indebtedness in connection with a series of leveraged
transactions and completed a debt restructuring in November 2001. As a result,
debt service obligations represent significant liquidity constraints for us. We
were in compliance with all covenants related to all debt agreements at
September 30, 2003.
As stated previously, our term loan facility and senior secured notes, totaling
$106.9 million book value ($118.6 million maturity value), is payable within the
next 12 months. Management has been assessing various financing alternatives to
repay this debt and will complete in mid November issuance of new private debt,
the proceeds of which will be used to repay the existing debt. Telex filed
Report on Form 8-K on November 3 and 4, 2003 explaining more fully our debt
refinancing.
Telex will record a normal pension income of approximately $0.1 million in 2003
primarily due to the decision to freeze future pension plan benefits effective
June 30, 2003. Telex was not required to make an employer contribution to its
pension plan in 2002 for the 2001 plan year. As of September 30, 2003 we have
made employer contributions to the pension plan of approximately $1.6 million
and we will be making contributions of approximately $1.4 million in the next 12
months for the 2003 and 2004 plan years.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency
exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign exchange and
interest rates. We have entered into various financial instruments to manage
this risk. The counterparties to these transactions are major financial
institutions. We do not enter into derivatives or other financial instruments
for trading or speculative purposes.
EXCHANGE RATE SENSITIVITY ANALYSIS
We enter into forward exchange contracts principally to hedge the currency
fluctuations in transactions denominated in foreign currencies, thereby limiting
our risk that would otherwise result from changes in exchange rates. During the
nine months ended September 30, 2003, the principal transactions hedged were
certain intercompany balances attributed primarily to intercompany sales. Gains
and losses on forward exchange contracts and the offsetting losses and gains on
the hedged transactions are reflected in the condensed consolidated statements
of operations.
At September 30, 2003, we had outstanding forward exchange contracts with a
notional amount of $7.4 million and a weighted remaining maturity of 43 days.
At September 30, 2003, the difference between the fair value of all outstanding
contracts, as estimated by the amount required to enter into offsetting
contracts with similar remaining maturities based on quoted prices, and the
contract amounts was immaterial. A 10 percent fluctuation in exchange rates for
these currencies would change the fair value by approximately $0.7 million.
However, since these contracts hedge foreign currency denominated transactions,
any change in the fair value of the contracts would be about offset by changes
in the underlying value of the transaction being hedged.
INTEREST RATE AND DEBT SENSITIVITY ANALYSIS
For fixed rate debt, interest rate changes affect the fair market value but do
not impact our earnings or cash flows. Conversely, for floating rate debt,
interest rate changes generally do not affect the fair market value but do
impact our future earnings and cash flows, assuming other factors are held
constant.
At September 30, 2003, we had fixed rate debt of $62.6 million, step-up,
pay-in-kind interest debt of $48.3 million (redemption value of $48.8 million at
September 30, 2003), and an interest-free loan of $1.0 million. Holding all
other variables constant (such as foreign exchange rates and debt levels), a
one-percentage point decrease in interest rates would increase the unrealized
fair market value of these debts by approximately $2.2 million.
At September 30, 2003, we had floating rate debt of $72.5 million. The earnings
and cash flow impact for the next twelve months resulting from a one-percentage
point increase in interest rates on this debt would be approximately $0.7
million, holding all other variables constant.
20
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of Telex's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) as of September 30, 2003. Based on that evaluation, our
management, including the CEO and CFO, concluded that (i) our disclosure
controls and procedures were effective as of the end of the period to ensure
that the information that we are required to disclose in the reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms, and that
(ii) the information that is required to be reported is accumulated and
communicated to management, including our principal executive and financial
officers, as appropriate, to allow timely decisions regarding required
disclosure. There have been no significant changes in our internal controls or
in other factors that could significantly affect Telex's internal controls.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Telex's Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Telex's Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Telex's Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
22
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
TELEX COMMUNICATIONS, INC.
Dated: November 14, 2003 By: /s/ Raymond V. Malpocher
---------------------------- ----------------------------------
Raymond V. Malpocher
President and Chief Executive
Officer
TELEX COMMUNICATIONS, INC.
Dated: November 14, 2003 By: /s/ Gregory W. Richter
---------------------------- ----------------------------------
Gregory W. Richter
Vice President and Chief
Financial Officer
23
TELEX COMMUNICATIONS, INC.
FORM 10-Q
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
31.1 Certification of Telex's Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Telex's Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002.
24